How the music industry got it wrong: Pt 1

Games are now bigger than music at High Street retail. Something to shout about? Only if you believe that being more valuable than an industry segment which is universally acknowledged as being in terminal freefall is a cause for celebration.

The games industry is in the happy position of being able to watch the mistakes (and there have been many) that the music industry has made and to draw from them lessons on how we can best capitalise on the changing nature of consumers’ relationships with the media they enjoy.

Otherwise, we run the risk of following the recorded music industry into rapid decline.

LESSON ONE: The consumer sets the price

There are many commentators who believe that within two decades, all music will be free. Already, you can find many copyrighted songs and music videos freely available on Youtube and other websites. There is no doubt that some consumers will pay for music, perhaps on impulse in a supermarket, or because they must own the latest ringtone, or due to the convenience of iTunes. But the reality is that many consumers do not feel the need to pay for music and the era of premium-priced, back-catalogue albums is rapidly becoming a distant memory.

In the games world, publishers may believe that they set the price of a game. This is not true. Retailers may claim they are the price-setters. This is closer to the truth, but still not accurate. It is the consumer that sets the price that they will pay for games. There are many mechanisms by which this is done. These include:

* Piracy: The industry’s bete-noire, which will never go away (unless all product is free to buy, of course)

* Rapid discounting: Why buy a game at 39.95 when it will be 19.95 in three months and 9.95 in six? There is admittedly a faster curve for PC games than console titles, but a consumer can set the price simply by waiting.

* Trade-ins: For many consumers, the price of a new (to them) game can be as low as a fiver, the difference in price between the credit they get for a trade-in game and the cost of a new title.

The stark reality, demonstrated most cataclysmically in the music industry, is that as distribution routes multiply and entertainment media becomes less scarce, the consumer has more power than the media owner in terms of price setting. The music industry’s attempts to maintain premium pricing for their packaged products seem already doomed; it would be foolish of the games industry not to plan for a similar scenario to emerge for us.

LESSON TWO: It’s all about experiences

It seems perhaps unlikely to draw business analogies from Madonna, but on the other hand, she has successfully reinvented herself in three successive decades, and her recent album decisions can be seen as a defining moment for the music industry. Madonna recently departed from her long-standing relationship with record label Warner Bros and signed a new $120 million, ten year deal with Live Nation whose expertise is unequivocally in live events. This decision by Madonna may well represent her belief that the monetary value of the album is low, maybe even zero: albums and singles will become marketing tools for fabulously profitable live tours, not money spinners in their own right. Radiohead’s recent experiment asking consumers to choose how much to pay for In Rainbows is an extreme example of this trend.

The games industry has already taken this to heart. World of Warcraft is entirely about experiences and is probably the most cash-generative game around, but this learning may go further than simply suggesting that the future of all games is massively-multiplayer. In a crowded entertainment market, one-off events and experiences command a major premium – just think of the high and rising prices of concert tickets. Finding ways of offering unique game events and storylines that take place in real time would be one powerful way of adapting to the changing market.

LESSON THREE: The music biz is thriving; it’s the music companies that are stuffed

No-one is arguing that consumers don’t want music anymore. Quite the reverse: the easy availability of music on iPods, PCs, mobile phones and elsewhere mean that music is more in demand than ever. What is suffering is the bloated, inefficient, archaic structure of record labels that were set up in the days of scarce distribution and limited competition, when the album ruled. Whether Guy Hands’ Terra Firma can make a success of EMI remains to be seen; what is clear is that the days of massive record labels making enormous profits on a limited number of titles while running inefficient infrastructures are well and truly over.

– Head over to part two or read more industry analysis at nicholaslovell.com.